Real Estate Glossary

Listed below are brief descriptions of some common terms used in real estate transactions. These are general terms and definitions and are not intended to apply to all possible uses of a term. Please let us know if you have any questions regarding these items.

Accelerated Clause: Loan verbiage that provides the lender with the right to demand payment of the entire outstanding balance on your home loan, if you miss a monthly payment, sell the home, or otherwise fail to perform as promised under terms of your mortgage.

Adjustable Period: The length of time between interest rate changes on an ARM. For example, a loan with an adjustable period of one year is called a one-year ARM, which means that the interest rate can change once per year.

Balloon Loan: Requires level payments just as a 15-year or 30-year fixed rate loan. But well before the date it becomes due, the full remaining balance of the loan comes due. Though they can be economical at the outset, beware of balloon loans – you may not be able to refinance the loan.

Binder: Sometimes known as an offer to purchase or an earnest money request. A binder is the acknowledgement of a deposit along with a brief written agreement to enter into a contract for the sale of real estate.

Buydown: A Veteran’s Administration loan plan available only in some new housing developments. A builder agrees to pay part of the mortgage for the first few yeas. Sellers also may create buydowns by paying lenders a predetermined amount of money so lenders will reduce their interest rates.

Buyer’s agent: A person licensed to negotiate and transact the sale of real estate on behalf of the buyer. The buyer’s broker or agent owes allegiance only to the buyer and does not have an agent relationship with the seller.

Closing Costs: Generally total from 2 percent to 5 percent of the home’s purchase price; separate from the down payment. Covers a number of costs including loan document processing fees, appraisal report fees, credit report fees, etc.

Closing Statement: The financial disclosure statement that accounts for all of the funds received and expected at the closing of the escrow, including deposits or taxes, hazard insurance and mortgage insurance.

Commission: The fee charged by a broker or agent for providing services related to a real estate transaction such as procuring the property, bringing the parties together and negotiating a purchase contract or loan.

Condominium: A form of real estate ownership. The owner receives title to a particular unit and has a proportionate interest in certain common areas. The unit itself is generally a separately owned space whose interior surfaces (walls, floors, and ceilings) serve as its boundaries.

Contingencies: Conditions, contained in the Purchase Agreement, which outline the obligations the seller and buyer must fulfill before sale of the property is completed. Can concern the results of your effort to obtain financing, an inspector’s opinion of the condition of the property, etc. For instance, a sales agreement may be contingent upon the buyer obtaining financing.

Conversion Clause: A provision in some ARMs that enables you to change an ARM to a fixed-rate loan, usually after the first adjustment period. The new fixed rate is generally set at the prevailing interest rate for fixed rate mortgages. This conversion feature may cost extra.

Cooperative: A form of multiple ownership in which a corporation or business trust entity holds title to a property and grants occupancy rights to shareholders by means of proprietary leases or similar agreements.

Default: You are officially in default when you fail to make two or more monthly mortgage payments on time. This does not automatically indicate that you will lose your home, however. Many lenders will help you work to find a solution, as foreclosure is expensive for the lender.

Escrow: A procedure in which a third party acts as a stakeholder for both the buyer and the seller, carrying out both parties’ instructions and assuming responsibility for handling all of the paperwork and distribution of funds.

Exclusive listing: A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time, but reserving the owner’s right to sell the property himself without the payment of a commission.

Federal National Mortgage Association: Popularly known as Fannie Mae. A privately owned corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA or guaranteed by VA, as well as conventional home mortgages.

Fee Simple: An estate in which the owner has unrestricted power to dispose of the property as he wishes, including leaving by will or inheritance. It is the greatest interest a person can have in real estate.

FHA Loan (Federal Housing Administration): A federal agency, created by the National Housing Act of 1934, for the purpose of expanding and strengthening home ownership by making private mortgage financing possible on a long-term, low down payment basis. The vehicle is a mortgage insurance program, with premiums paid by the homeowner, to protect lenders against loss on these higher risk loans. Since 1965, FHA has been part of the newly created department of Housing and Urban Development (HUD).

Foreclosure: The legal process of the mortgage lender taking possession of and selling the property. When you default on a loan and the lender determines you are incapable of making payment, you may lose your house to foreclosure.

Interest Rate: The percentage fee lenders charge you to use their money. The higher the rate of interest, the higher the risk. For fixed rate mortgages, the interest rate has a corresponding relationship with the points. A high number of points will lower the rate and vice versa. With an adjustable rate mortgage, understand the formula (the index plus the margin) that determines how the interest rate is calculated, after the teaser rate expires.

Life Cap: Determines the total amount that your adjustable mortgage interest rate and monthly payment can fluctuate during the duration of the loan. Different from the Periodic Cap, which limits the extent to which your interest rate can fluctuate during a predetermined adjustment period.

Mortgage Banker: A company or individual engaged in the business of originating mortgage loans with its own funds, selling those loans to long term investors, and servicing the loans for the investor until they are paid in full.

Mortgage Broker: A person who buys mortgages wholesale from lenders and then sells them to buyers. Can "shop your loan around" to find the best rate. Good for people with less-than-stellar credit histories.

Negative Amortization: Occurs when monthly payments fail to cover the interest cost. The interest not covered is added to the unpaid principal balance so that even after several payments, you could owe more than you did at the beginning of the loan.

Partnership: Way in which unmarried individuals can take title to a property. Can include domestic partners or business partners. It’s recommended that a real estate lawyer first draw up a written partnership agreement before the purchase.

Planned Unit Development (PUD): A zoning designation for property developed at the same or slightly greater overall density than conventional developments, sometimes with improvements clustered between open, common areas.

Point: An amount equal to one percent of the principal amount of the investment or note. The lender assesses loan discount points at closing to increase the yield on the mortgage to a position competitive with other types of investments.

Probate sale: Sale of a home after a homeowner dies and the property is to be divided among inheritors or sold to pay debts. The executor of the estate organizes the sale, and a probate court judge oversees the process. The highest bidder receives the house.

Prorations: Items that must be prorated between you and the seller at the close of escrow. Can include Homeowner’s dues, property taxes and other expenses. Generally, you will be responsible for paying a percentage of these taxes and fees beginning on the day you take title.

Refinance: Taking out a new mortgage loan to receive more favorable terms. Generally recommended for fixed-rate mortgages if rates drop below 1 percent of what you’re currently paying. However, refinancing can be expensive and time-consuming, so you’ll want to consider this action carefully, and to ask yourself how long you plan to own the property.

Veterans Administration (VA): An independent agency of the federal government created by the Service Men’s Readjustment Act of 1944 to administer a variety of benefit programs designated to facilitate the adjustment of returning veterans to civilian life. Among the program’s benefits is the home loan guaranty program designated to encourage mortgage lenders to offer long term low down payment financing to eligible veterans by guaranteeing the lender against loss on these higher-risk loans.